Reports over the weekend have suggested that General Motors sees acquiring Chrysler as a way of boosting cashflow at a time of tightened credit and falling revenues, and that some sort of deal is close. It has also been reported that negotiators hope to finalise a deal before the 4 November presidential election and are lobbying for government financial assistance to help it.
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According to USA Today, the negotiators have pointed out the likely impact on the US economy if either company (employing about 100,000 blue collar workers alone) were to fail, compared with the viability of a merged giant that would control 36% of the US vehicle market.
Those are the chief selling points in asking for government help, an anonymous source told the paper.
According to USA Today, Chrysler majority owne Cerberus Capital Management has been pushing to make GMAC, GM’s financing arm, a significant part of the deal. Cerberus already owns more than 50% of GMAC but wants it all. The source reportedly said that’s been a sticking point because GM has said it won’t give up its stake.
Talks are expected to continue this week, the paper added.
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By GlobalDataSo far, none of the Detroit-based parties have commented officially on the media reports, nor have there been any denials.
Anonymous sources told Reuters that negotiations between Cerberus and GM had “intensified” in the last few days and were moving closer to conclusion.
But the news agency noted that the idea of merging the two automakers has been viewed as a deal of desperation by most analysts since both are losing money and are saddled with a cash-draining surplus of American dealers, workers and plants.
But the sources said GM executives believe they could agree a deal that would give the firm a share of Chrysler’s remaining cash while allowing it to cut costs quickly.
Cerberus has apparently plenty of cash on hand and has said it ended June with $11.7bn.
It is likely, though, that many of Chrysler’s 14 assembly plants would be doomed by any merger though GM reportedly is only interested in keeping Chrysler plants where there have been significant investments in retooling, the Reuters sources said.
Those plants could include the truck plant in Saltillo, Mexico, the Jefferson North Jeep plant in Detroit and the Belvidere, Illinois car assembly plant, one source briefed on the talks told the news agency.
But the subsequent plant closures with thousands of job losses would hit states like Michigan and Ohio – already hard-hit by earlier cutbacks and the general economic malaise – this is been a key issue for both presidential candidates who have put considerable time and money into their campaigns in those states.
“This would basically mean the end of Chrysler,” Global Insight analyst Aaron Bragman told Reuters.
Reuters noted any merger would also have to deal with Chrysler’s obligations to a health-care trust affiliated with the key United Auto Workers and creditors representing $9bn in debt.
Sources familiar with the thinking of Cerberus have told the news agency the private equity firm wants to keep a stake in any such merger.
Sources also told the news agency that GM is keen to quickly get a share of the $25bn in recently approved, taxpayer-backed loans from the US government and secure the Chrysler deal as finance is now so hard to secure elsewhere. Its ‘captive’ finance arm, GMAC, part-owned with Cerberus, has recently restricted vehicle loans as it cannot get enough finance.
Reuters noted that GM had burned through $3.6bn in cash in the second quarter and was expected to show an even faster rate of cash burn in the current quarter as vehicle sales fell further and it booked costs for cutting about 5,000 salaried jobs.
GM ended the second-quarter with $21bn in cash and has said it needs to maintain $11bn and $14bn.
Analysts reportedly said it was not clear how much of that would be left for GM after payouts to cut unionised factory jobs and to dealerships the merged company would no longer need.
GM last July announced a series of cost cutting measures intended to boost liquidity by about US$10bn.
These included white collar job cuts, the axing of salaried retiree health care and executive cash bonuses, a reduction in sales and marketing spend and the postponement of healthcare-related cash transfers and some large vehicle redesign programmes. The automaker also suspended shareholder dividends and planned asset sales (it has since put Hummer on the block) and “capital market activities” to raise an additional $4-7bn.
Analysts had been concerned that GM, burning an estimated $1bn in cash a month, could run out in 2009 and perhaps even file for US Chapter 11 bankruptcy protection. GM said then it had liquidity of $23.9bn and access to another $7bn through US credit facilities.
“While the company has ample liquidity to meet its 2008 funding requirements, it is taking additional measures to bolster liquidity to protect against a prolonged US downturn,” CEO Rick Wagoner said at the time. The actions announced were expected to boost cashflow by about $15bn.
Reuters noted that US car dealerships are independent businesses protected by franchise laws and that it cost GM an estimated $2bn to axe Oldsmobile in 2000.
“How much of the Chrysler cash is left remains to be seen,” Global Insight’s Bragman told the news agency. “A good chunk would have to go toward closing hundreds if not thousands of dealers.”
GM has around 6,550 outlets for eight brands while Chrysler started the year with about 3,500 though it has been looking to reduce that number and shift more of its retail outlets to dealerships that carry all three of its brands.
Chrysler’s sales were off 25% to the end of September and GM’s down almost 18%, according to WardsAuto.com data.
Earlier this month, Los Angeles-based analysts Edmunds.com compared total gross profits from new vehicle sales this year and in 2007 and concluded that 25% had been lost so far this year.
Edmunds said 30% of dealers dropped from more than 55 monthly new sales in 2007 to fewer than 55 this year and, of the 70% of dealers who saw a drop in total gross margin this year, 28% lost more than half of their gross margin.
Recent casualties included Bill Heard Chevrolet, the nation’s largest dealer for the brand, which went out of business at the end of September.
There are over 20,000 car dealerships in the US employing over 1m people, accounting for 18% of total retail sales.
“We’re likely to lose up to 700 dealerships this year,” the National Automobile Dealers Association said at the beginning of October. “Some of these [closings] stem from the challenges faced by the Detroit Three.”
Reuters also noted that any GM-Chrysler merger would have to face union objections – even after all the recent buyouts, GM still has 64,000 hourly workers in the United States while Chrysler has 33,000.
